Role of Credit Bureaus in Credit Card Approvals

If the credit bureaus rate your credit high, you may find your mailbox flooded with credit card offers from the thousands of credit card issuers in the country. There are many banks offering various credit cards, with rewards this and rewards that; platinum, gold, or silver; and so many variations thereof. You may get offers from your professional organization (lawyers, doctors, and engineers), your alumni association, and your environment club or sports association. Thousands of others, who are rated as safe payers by the various credit bureaus, receive similar offers. In fact, every year credit card issuers send out several hundred millions of offers. To process all of the applications resulting from these offers, the credit card industry makes extensive use of quantification, or credit scoring, to double check whether an applicant should be issued a credit card (or even become target for other kinds of credit). The industry turns to credit bureaus for the quantification part. The credit bureaus credit scoring systems give creditors the capability to evaluate millions of applicants on a consistent and impartial basis. This has made the credit card one of the most highly efficient methods of obtaining, granting, and expending loans. The credit bureaus base their credit scoring systems on large samples of the population in order to make it statistically valid. In the credit card industry, the credit scoring system generally involves a two-step process. First, your credit card application itself is scored by the credit card company. For example, if you own your home you are likely to get more points than if you only rent one. If your application obtains a sufficient number of points, then the credit card company buys your credit report from the three major credit bureaus. The three credit bureaus operating nationwide are Transunion, Experian, and Equifax. The issuers buy from all three credit bureaus because your Experian credit report will have different ratings from your Equifax credit report, and the credit score Transunion will also differ from the rest. The variation exists because each of these credit bureaus will have different sets of businesses and creditors that report to them. Thus, although the parameters that the credit bureaus track may be similar, the quantification or credit scoring results will differ. The score on the credit report issued by each of the credit bureaus is central to the decision to issue a card. As the vice president of a company that is in the business of designing scoring models for lenders once described it, an applicant may submit an application that’s good as gold, but if the credit reports from the credit bureaus are lousy, the applicant will get turned down every time. In other words, it is the numbers on the ratings submitted by the credit bureaus, not the qualitative factors, which are ultimately decisive. It may turn out, in the end, that the majority of applicants will get approved by one credit card firm or another. Because the profits from the credit card business are extraordinarily high, credit card firms can afford to have a small proportion of cardholders who are delinquent in paying their bills or even some of those who default on their debt. Nonetheless, it is in the interest of credit card companies to weed out those who will not be able to pay their accounts. Scoring models of the credit bureaus will also vary from one locale to another, and these are regularly updated to reflect changing conditions. Despite great variation between the different credit bureaus’ reports, the following items generally receive the most weight: · Possession of a number of credit and charge cards (30 per cent or more of the points). You should realize that if you own too many cards, this may cost points, and that having no cards at all may be an even more serious liability. Having too many cards will increase the amount of credit that is available to you at any time, and it would be easy to run up your debt by charging more to the various credit cards. This is what causes concern with the lenders. On the other hand, the credit bureaus believe not having a credit card at all is definitely alarming: there must be something terribly wrong. · Record of paying off accumulated charges (25 percent or more of the points). You are likely to lose more points if you are delinquent on any of your credit cards than if you are late on a payment to a department store. The observed credit behavior that is common among the credit bureaus’ scoring models is that when people are having economic difficulties, they will try to stay current on their credit card payments but might let their department store bill slide. Thus, if you are delinquent on card bills, this is interpreted as an indication of serious financial difficulties. Delinquencies of 30 days might not cost you too many points, as allowance is given for late payments, but delinquencies of 60 days or more might well scuttle your chances of getting a new card. · Suits, judgments, and bankruptcies involving the applicant. Bankruptcies are likely to be particularly damaging to your credit rating. Officers of credit bureaus explain that among lenders, they are not in any way forgiving about bankruptcy; the interpretation is that a bankrupt ripped off a creditor and got away with it legally.’ · Measures of stability. You will earn credit points for longer tenure on the job and in your place of residence. In the scoring models of credit bureaus, someone who has lived in the same place for three or more years might get twice as many points as someone who has recently moved. · Income. It goes without saying that the higher your income, the greater the number of points you will earn from the credit bureaus on this parameter. It will certainly help if you have other income sources in addition to your job. · Occupation and employer. If you belong to the highest-rated occupations, executives and professionals, you are likely to earn a large number of points from the credit bureaus. Similarly, being in the employ of a stable and profitable firm is likely to garner you many points, whereas employment in a firm on the edge of bankruptcy is likely to be very costly. · Age. Generally, the older the applicant, the greater the number of points awarded by the credit bureaus. Those who have retired will probably earn fewer points on this aspect. · Possession of savings and checking accounts. Checking accounts, because they tend to require more ability to manage finances, generally score twice as many points with the credit bureaus than savings accounts do. · Homeownership (often 15 per cent of the total points). An applicant who owns a home is more stable than one who rents, has a sizable asset to protect, and is responsible for regular payments. This translates to higher points awarded by the credit bureaus. The role of credit bureaus in making credit card approvals a speedy process cannot be overemphasized. Although you may think the system is arbitrary or impersonal, it does help make decision-making faster, more accurate, and more impartial than individuals. The credit bureaus thus take pains to ensure that their credit scoring models are properly designed to embody this impartiality and give equal credit opportunity — including those who may not garner enough points and become marginal cases in the overall credit scoring system.

On Banks

Copyright 2006 Geoff Gannon Superficially, banking appears to be a commodity business. In fact, it appears to be a particularly poor commodity business, because capacity is not constrained by the need to invest in a substantial physical infrastructure. True, whatever investments are made in tangible assets are usually intended as a means to acquire more intangible assets; however, a branch is hardly comparable to an oil well. A bank’s ability to lend money (and thus produce income) is not completely and inextricably linked to the size of its deposits. In other words, loans are the result of both a bank’s capacity to lend money and its willingness to lend money. It’s hard to find a parallel in tangible commodity businesses. Theoretically, this should make little difference in the long run. However, the lack of physical supply constraints in the market for loans creates the possibility for large, industry-wide mistakes. Pricing in such an industry can get very weak at times. There’s one catch here. The underlying assumption whenever the commodity business label is used is that both the demand for a product and the supply of that product are general in nature. They can’t be specific, because that would destroy the involuntary nature of pricing within the industry. For example, if all pineapples were unbranded, identically tasting fruits the demand side of the business would meet the requirement for a commodity business. However, if most pineapples take eighteen months to grow, but there is one magical plantation where the fruit develops fully in just three months, the supply side of the business does not meet the requirement for a true commodity business. The magical pineapple plantation would produce six times as much fruit per acre and thus the plantation owner would be able to undercut his competitor’s prices. He would earn extraordinary profits, because the return on capital in his business would be much higher than that of the industry as a whole. What does this fairy tale have to do with banking? It suggests extraordinary profits can come from having “sticky” customers or lower costs. The lower costs needn’t be the result of lower marginal inputs. The magical pineapple plantation turned the crop over faster; it didn’t need access to below market prices for any of its inputs. The same is true of a grocery store. Two stores that buy and sell cans of soup at the same exact prices may have very different returns on capital, if one of the stores turns over its inventory more quickly, because the fixed costs will be spread over a larger number of sales. How does this relate to banking? While a quick turnover (or some other form of operational efficiency) is the most common reason for one firm’s unusual profitability in a commodity type business, there are other ways to earn extraordinary profits. Some of them are conceptually quite similar to the idea of owning a magical, one of a kind pineapple plantation. In such situations, the product appears the same to the consumer; but, the producer is actually unique (or at the very least special). All of this helps to explain why some banks are more profitable than others. However, it doesn’t address the question posed by Morningstar. So, do all banks have moats? Before answering that question, it might be best to ask under what circumstances all banks could have moats. What could insulate an entire industry from the ravages of competition? This is the question I discussed in the podcast episode: “Nature of Competition”. Why can some industries support plenty of profitable players, while others merely support a handful, one, or none? Switching costs are one of the most commonly cited reasons for a wide moat. I think the matter is actually a lot more complicated than that. Financially prohibitive switching costs do create moats. However, most wide-moat companies don’t have truly prohibitive switching costs. What they do have is a situation in which it makes little sense to switch to a competitor and/or a tendency for their customers to not actively seek to learn more about competing products. Where the cost of a product is particularly small per cash outlay, consumers are usually apathetic about seeking out alternatives. The key here is that the amount has to seem very small to the buyer at the time the purchase is made. If you buy a cup (or two) of coffee every morning, it does not occur to you that you are spending hundreds or thousands of dollars a year on that coffee and that you could save a lot of money by buying the cheaper alternative. However, if you’re buying an appliance or piece of furniture the difference is immediately obvious and thus price is a major concern. Generally, if a product can be sold over and over again at a very low price per transaction, profits will be higher, because the buyer will not make much of an effort to compare prices. Likewise, if a customer is billed for a variety of different products or services each amounting to only a small charge, the customer’s price awareness will be lower than if the charges were combined and listed as a single item. Where price visibility, comparability, or immediacy is reduced, greater profitability becomes more likely. People are very sensitive to price differences between large, juxtaposed numbers. If tomorrow the federal government prohibited gas stations from posting their prices per gallon, drivers would begin to become less concerned about gas prices. There would be an uproar at first. But, over the years, gas prices would receive less and less news coverage and would fall off the list of consumer concerns. Obviously, a crude oil price quoted in dollars also contributes to price awareness. But, the point remains the same. Where prices are less visible, price competition is less fierce. Compounding is a great way to exploit a lack of price awareness. The differences between various interest rates always seem small when placed side by side. Over time, these differences become quite large. However, the fact that no large differences are clearly visible at the time a decision is made about where to bank helps to minimize price competition between banks. It also increases the relative importance of other aspects of banking like convenience and service. Usually, the cost to make a good impression is very low compared to the size of the assets that could result from attracting more deposits. On the other hand, the importance of making a good second and third impression is minimal. Once a depositor uses a particular bank, they are unlikely to visit competitors. When they need to do their banking, they will go directly to their own bank (or its website). This is very different from the environment found in most consumer businesses. Packaged goods companies have their products placed next to their competitor’s products on store shelves. Retail stores are usually clustered. Whether they are located in malls or in free standing buildings, it’s a safe bet the customer has to pass at least one competing retail outlet to shop at their favorite location. In most cases, the other location won’t compete in every category as the customer’s favorite store; but, it will offer at least some competing products. As a result, the shopper is offered the option of switching every time she makes the trip. When someone walks into a bank, it’s usually their own bank. They don’t have any use for other banks (after all, their money isn’t there). The cost of switching banks isn’t very high. However, the amount of active effort required to make the switch is substantial. Switching banks isn’t as easy as switching toothpaste. But, more importantly, the alternative isn’t as obvious in banking. We all know other banks exist. But, unless we have a reason to consider switching from our current bank, we don’t even bother to check out the competition. The result is a very narrow, very real moat.

Margin Trading Dangers Highlighted by Real Cases

Margin Trading Dangers Highlighted by Real Cases Several recent high profile company share price collapses on the Australian Stock Exchange highlight the danger posed to ordinary shareholders from large scale margin trading of shares by directors of listed firms. So dramatic have been the consequences that no equities investor can afford to ignore the lessons. Significant shareholdings by directors in a listed company have traditionally been viewed favourably as an alignment of executives' and other private shareholders' interests, but this ideal can be dramatically compromised in cases where those large shareholdings have been aggregated through, and remain security for, margin loans. Directors leveraging into positions well beyond their capacity to meet margin calls may create a known and acceptable risk for themselves but their actions inescapably also create a significant but hidden and usually unsuspected risk for other shareholders. On exposure in a falling market, the consequences can be devastating to all concerned. Basically margin trading involves borrowing through a brokerage to purchase shares on deposit with the shares purchased being held as collateral for the loan. As with all leveraged investments the potential for both amplified profits and losses exists, but particular additional risks attach to margin trading of shares. Depending on the particular share being purchased and subject to other margin account criteria such as maintenance of a minimum balance, a private investor may be able to borrow, say, 50 loan to collateral value must be maintained at all times - hence a 50, owing to the director's perceived influence on the company and the scale of business such a purchase will bring to the margin broker. Thus the director's margin is only 20 of the purchase price of one million $10 shares through a margin broker. Borrowings amount to $8 million with $2 million "equity" being put up by the director to complete the $10 million purchase. Furthermore, the margin trading agreement states that a minimum 80 to a market value of $9 per share will reduce the director's holding of 1 million shares to a value of $9 million, but still carrying the $8 million debt and therefore breaching the 80 loss) will then be served with a "margin call" for a further $1 million to re-establish the original loan/asset ratio. Failure to meet the call will invoke conditions allowing the margin broker to sell some of the holding to re-establish the required 80 in the $10 share price to $8 would see the director's initial $2 million equity wiped out altogether and, in the absence of any margin call being met, the broker would very likely dump the entire holding at best price to minimise losses. Apart from sheer pressure of volume, attendant negative publicity through stock exchange disclosure requirements would probably see the company's share price devastated even though the company may remain as a viable enterprise. Any shortfall in recovery by the broker through sale of shares held as collateral would remain a liability against the director. In this situation private shareholders become unsuspecting victims of a risk they didn't even know existed. This scenario is far from academic. In a number of now salient Australian cases, dumping of directors', executives' and related party holdings have indeed seen share prices slashed, stock exchange listings suspended, directors and executives lose their jobs with their entire company shareholdings wiped out. Residual personal liabilities are suspected of being huge in some cases. Consequently, private investors have also suffered massive write downs in the value of their own holdings. Needless to say, any company subject to such a fate will find it nearly impossible to raise fresh equity capital and will pay heavily for debt - particularly in today's credit crunched world. Assuming the enterprise can remain solvent, aggressive sale of assets becomes the most logical choice to fund a restructuring program. Private investors engaged in margin trading the same company may well suffer a similar fate to the directors, albeit without a loss of employment. A more detailed case study is available through the resource link. As the case study points out, effects of a major margin call default can be widespread and devastating, seriously affecting even secured investors in related companies. So how should the private investor guard against such an unwelcome outcome to a seemingly quite reasonable investment? As we have discussed, potentially damaging margin trading by directors and executives can be difficult to detect, but some clues may be available through stock exchange announcements. Better still, just ask the Company Chairman through private correspondence or at the Shareholder's Annual General Meeting. Companies able to report a clean slate in respect of such activities are likely to be happy to do so. Investigate the others. In one recent case it turns out that not only were directors purchasing shares on margin for their own accounts but were also margin trading other listed shares with shareholders' funds in the Company's name. Needless to say the Company and its shareholders soon lost many millions of dollars once markets suffered a modest reversal. For the private investor, good advice is to avoid margin trading through a margin broker altogether. This, however, does not completely exclude the leveraged purchase of shares which remains a valid investment strategy under certain circumstances. It does, however, place vital separation between financier, sharebroker and shareholder. In one recent Australian margin trading case, some private investors reportedly had their entire nominee-held share portfolios seized and sold to recompense the margin financier, a major bank. When the margin brokerage house collapsed, private investors were left as unsecured creditors of the failed broker. Prospects of recovery from this position would be dim indeed. At a time when ever more complex means of trading traditional share markets are being developed, such as options, short selling, stock borrowing and margin trading, investors need to recognise that new opportunities for exceptional profit also bring exceptional new risks. Some may well be hidden behind a cloak of "immateriality" even though potential consequences could be disastrous. In summary, private investors can minimise exposure to margin trading risk by taking a few precautions: " Treat very fast growing companies with caution. These companies and their high profile directors seem most susceptible to the allure of big rewards offered by serious margin trading while overlooking the exceptional risks posed to both themselves and others. " Examine available stock exchange announcements and news to unearth margin trading practices relating to major shareholdings, including those of directors, executives and related parties. These may be difficult to find and interpret, but they do exist. " Simply ask the Company Chairman if Directors and Executives or even the Company itself, is involved in margin trading the company's own shares - if the answer is yes, stay away. " Also ask if shareholders' funds are being used to margin trade any other company's shares - hidden danger lurks there too. " Avoid personal use of margin share trading accounts altogether - borrow elsewhere if you intend to use leverage for share purchases. " Ensure any shares you purchase on leverage are registered in your own name to avoid the possibility of seizure by a higher ranking creditor should your sharebroker's business collapse. Eventually disclosure of margin trading by company directors, executives and related parties may become mandatory under stock exchange listing rules, but until that time equity investors will need to include "margin trading risk" as yet another factor for their own determination.

Identity Theft: Don't Become A Victim!

Moments after stepping out of the taxi, Rachel plunged through the entranceway of the hotel lobby eager to put behind what had been a terribly exhausting day. Flight delays due to weather had caused her LAX-MDW-BWI trip to take nearly eleven hours to complete. All she could think of was taking off her shoes to relieve her aching feet and dipping them into soothing, warm bath water. The line at the front desk was mercifully short. One clerk caught Rachel's attention and signaled her forward — she gave him her reservation information and then dug out her American Express card for payment. As he stepped away to verify its authenticity Rachel's eyes surveyed the lobby. "They've updated everything since I was last here", she thought. Her concentration, clouded by fatigue, was now on the mission style tables, chairs, and light fixtures, which had replaced the heavy, wooden furniture previously occupying the lobby. "Here is your card and room key, ma'am," the clerk interrupted minutes later. Quickly, Rachel stuffed her card back into her wallet, gathered her bags and whisked away to her room. Rachel was a victim of identity theft that night, but did not know it at the time. Had she kept a watchful eye on what her clerk was doing instead of studying the lobby, she might have noticed him switching cards on her. At the very least, she would have seen that the card handed to her beneath her room key was not her own. Identity theft is an exploding problem that has increased exponentially in this technological age. Particularly since the early 1990s thieves have been taking advantage of what we would consider every day transactions: writing a check at the grocery store, ordering merchandise via the internet, applying for a credit card, using your cell phone, and more. Each transaction requires you to share personal information: your bank and credit card account numbers; your income, your Social Security Number (SSN); and your name, address, and phone numbers. An identity thief will lift some piece of your personal information and appropriate it without your knowledge to commit fraud or theft. One of the most common methods is when the identity thief uses your personal information to open a credit card account in your name. The Federal Trade Commission is the arm of the federal government tasked with overseeing the problem of identity theft. A special hotline number (1-877-IDTHEFT) was created for consumers to call to place your information in a database which is accessible with other law enforcement agencies and private entities, including any companies about which you may complain. Additionally, an ID Theft Affidavit — a form you can use to alert companies where a new account was opened in your name — can be filled out and given to the company. This affidavit is available online to consumers. Identity thieves can get your personal information in a number of ways: * They steal wallets and purse containing your i.d. and credit and bank cards. * They steal your mail, including your bank and credit card statements, pre-approved credit offers, telephone calling cards and tax information. * They complete a "change of address form" to divert your mail to another location. * They rummage through your trash, or the trash of businesses, for personal data in a practice known as "dumpster diving." * They fraudulently obtain your credit report by posing as a landlord, employer or someone else who may have a legitimate need for — and a legal right to — the information. * They get your business or personnel records at work. * They find personal information in your home. * They use personal information you share on the internet. * They buy your personal information from "inside" sources. For example, an identity thief may pay a store employee for information about you that appears on an application for goods, services or credit. Identity thieves will then take the personal information they have obtained about you and use it in a number of different ways: * They will call your credit card issuer and, pretending to be you, ask to change the mailing address on your credit card account. The imposter then runs up charges on your account. Because your bills are being sent to the new address, it may take some time before you realize that there is a problem. * They open a new credit card account, using your name, date of birth and SSN. When they sue the credit card and don't pay the bills, the delinquent account is reported on your credit report. * They establish phone or wireless service in your name. * They open a bank account in your name and write bad checks on that account. * They file for bankruptcy under your name to avoid paying debts they have incurred under your name, or to avoid eviction. * They counterfeit checks or debits cards, and drain your bank account. * They buy cars by taking out auto loans in your name. Fortunately for Rachel, American Express covered her losses. Although she didn't find out about the theft until she reached her home in California, American Express suspended her account when a number of suspicious charges appeared and she couldn’t be reached by them to verify the charges. Their fraud department left a message on her phone answering machine instructing her to call them and, when she did, Rachel was notified that someone else was using her card. When she explained that she had the card in her possession, she checked her purse and found a card for someone else instead. Visa, MasterCard and American Express absorb the cost of fraud as long as they are notified by the consumer [certain restrictions may apply — check with your card issuer for specific details]. Had Rachel used a debit card, the story might have been much different. Unlike a credit card, the debit card takes a direct hit on your bank account, meaning that you will have to absorb the loss. So, all is well with Rachel, right? Sure, American Express overnighted a new card with a new account number for Rachel to use on her next trip, but the problem could very well have continued — and deepened — had she not taken three more steps recommended by the Federal Trade Commission: First, contact the fraud departments of each of the three major credit bureaus. Tell them that you are a victim of identity theft. Request that a "fraud alert" be placed in your file, as well as a victim's statement asking that creditors call you before opening any new accounts or changing your existing accounts. This can help prevent an identity thief from opening additional accounts in your name. At the same time, order copies of your credit reports from the credit bureaus. Credit bureaus must give you a free copy of your report if your report is inaccurate because of fraud, and you make that request in writing. Review your reports carefully to make sure no additional fraudulent accounts have been opened in your name or unauthorized changes made to your existing accounts. Second, contact the creditors for any accounts that have been tampered with or opened fraudulently. Creditors can include credit card companies, phone companies and other utilities, and banks and other lenders. Third, if possible, file a report with your local police or the police in the community where the identity theft took place. Get a copy of the police report in case the bank, credit card company or others need proof of the crime. Even if the police are unable to catch the thief, the report can be helpful when dealing with creditors. In summation, identity theft is a problem that is causing businesses and consumers billions of dollars per year. As a result, higher interest rates and an increase in the cost of goods and services is passed on to consumers. So, do not be a victim — protect yourself from identity theft by remaining alert especially when a third party is handling your personal information.

Increase Your Rental Income Without Increasing Your Rents

Copyright 2006 John Visser Many Investors Lose Money On Their Rental Properties. Sometimes Without Realizing It. Here is a typical rental scenario: Mortgage payment going out: $1,100 per month. Rent coming in: $1,200 per month. This gives you $100 a month in positive cash flow. Or does it? On paper it looks good, but if you analyze the big picture and take into account your entire cost to own that rental property, you are losing money in a big way. Let’s analyze those costs over a year: Holding costs. Let’s say it takes three months to find a tenant for your property - $3,300 Spend marketing dollars to attract a tenant: $500. Termite treatment: $150. Landlord’s Insurance: $350. Cleaning the property after the last tenant moved out: $350. The water heater went out in February and you had to replace it: $400. Total mortgage payments for the year: $13,200. Other costs: $1,750. Total cost of ownership: $14,950 Rental income of 9 months: $10,800. Net loss for the year: $4,150. Now the picture looks very different. Even after your tax deduction of mortgage interest and depreciation, you still lost money. How do you fix the problem? The simplest answer of course is to buy right. This could mean putting down 20% so that your mortgage is much lower than the market rent, or it could mean that you need to buy your rental properties at steep discounts. Putting down 20% every time you buy a rental property will obviously limit how many properties you can buy, so the simplest answer here is the second option of paying less for the property. The 4 Biggest Reasons For Negative Cash Flow Investment Properties 1. You paid too much for the property. If your mortgage is not significantly less than the rent coming in, (and I mean several hundred dollars a month less), then you paid too much for the property. 2. You overestimated the rents you can get for your area. 3. The price you paid for the property was too high 4. You should have paid less for the property If your problem is that you paid too much for the property, then the rents in your area of course will not be high enough, and if you overestimated the rents on top of paying too much, you better have deep pockets or you are going to face foreclosure. Short of selling the property immediately, you can: Increase Your Rental Income Without Increasing Your Rents I am going to give you a financing strategy here that can let you cash flow hundreds of dollars per month. But. Like everything else that sounds too good to be true, it has a downside. There is a relatively new mortgage product on the market (Been around for about 6 years), called an Option ARM. It gives you 4 different ways you can pay it every month: Pick a payment similar to a 15 year mortgage (build equity fast) Pick a payment similar to a 30 year mortgage (build equity slow) Pick a interest only payment (build no equity) OR Pick the minimum payment (accrue negative equity) The minimum payment in option 4 can be as low as 1.5% (calculated like a fully amortized 30 year fixed payment). If you choose to pay the minimum payment, your payment in the scenario of this discussion will be $520 per month instead of $1,100 per month (I’m assuming that taxes and insurance are escrowed). Now if your rent is $1,200 per month, you have a positive cash flow of $680 a month on the same property with the same tenant and you never increased the rent. Well, that feels a little better doesn’t it? That may feel good, but here is the gotcha: Your minimum payment is less than your interest only payment. Since banks are not in the business of losing money, they will still calculate the full interest only payment for that month, they will just be happy to accept your minimum payment. So happy in fact, that they will take the difference between your minimum payment and the interest only payment, and add it to the outstanding loan balance. So now you owe them more than last month. Ouch. But wait, that may not be so bad. Why? You can still pay it like a 30 year or 15 year mortgage and only use the minimum payment when you have a vacancy. It will reduce the pain in your wallet when you have to spend money for marketing in addition to making the payment on that vacant property. This is an okay reason for getting an option ARM. But not a great reason. Why? Because the rate (not the minimum payment which is fixed for a year), will typically adjust monthly based on the index it is tied to. If rates are trending down, this mortgage is unbelievable. Every month you have to pay less since the interest only payment is going down, and you have the choice of the minimum payment in addition to that. If rates are trending up, then every month your interest only payment will be going up (while your minimum payment is fixed for a year). When this happens, this is no fun. By the way, as of May 2006 the market is trending up. Since this mortgage can make me cash flow very well every month, but also has a downside, in which particular situation should I use it? Great question. This is the question you should ask on every mortgage you ever get on an investment property. I would recommend this loan very strongly under the following scenario: Your goal is to sell the property in the next two years or less, and you will owe no more than 80% of the appraised value of the property on this loan (90% is okay if you are going to sell in one year or less). This is the perfect fit for this loan program. Here is why: You can make the minimum payment every month and enjoy the maximum cash flow right now. You will incur negative equity, but since your loan to value is fairly low, it will not make much of a difference over a one or two year period. You will have roughly $460 per month of negative equity for a total of $5,520 after one year, or $11,040 in two years (Not totally accurate, as your minimum payment will go up by 7.5% of the PAYMENT, not interest rate, once a year. But close enough for our illustration here.) That may sound high, but here is the hidden benefit: that negative equity is deferred interest. When you sell the property after one or two years, you can take that accumulated deferred interest as a tax write off in the year that you sell the property (check with your CPA on this since I am not a tax expert and I do not give tax advice). Since you can time this sale to a certain degree, you can use this deferred interest deduction to reduce your total tax bill should you have a windfall profit on another transaction in the same year. In other words, use the deferred interest deduction to offset the gain in another area. Remember also that you always have the choice of making the full interest only payment - you don’t have to incur the negative equity if you do not want to. The beauty of this mortgage is that it gives you options. Cash flow when you need it most, but still reducing your balance if you want to. The absolutely perfect fit is if you have a high equity situation and are selling on a lease purchase. That way you can enjoy the positive cash flow now, and still get a good profit on the sale. Many investors don’t make money on a lease purchase during the lease period. They only make money when the sale happens. In the time between you still have to put gas in your tank and provide for the family though, and you need cash to do that. Let’s see how the math works: You bought a rehab with hard money, fixed it up, and refinanced into an Option ARM. You choose to sell on lease purchase so that the sale will take place at least a year since when you bought the property, so that you will reduce your capital gains tax by half, and so the property will season for mortgage purposes. Since you have to feed your family in the meantime, you get $680 cash a month in your pocket while you wait for the big paycheck. Now multiply this by 5 properties using the above scenario. Five times $680 is $3,400 a month of positive cash flow. Can you do with a little extra cash while you wait on the big paycheck when you sell?

The Logic Behind Technical Analysis

Let me first say that I do not now engage in technical analysis; nor, have I ever engaged in technical analysis. I do not believe doing so would be a productive use of my time. Having said that, I do not claim technical analysis has no predictive value. In fact, I suspect it does have some predictive value. The Efficient Market Hypothesis is flawed. It is based upon the (unwritten) premise that data determines market prices. As Graham so clearly put it in “Security Analysis”: “…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.” I’ve seen a lot of people cite this quote, without bothering to notice what’s really being said. Graham had a very broad mind, much broader than say someone like Buffett. That’s both a blessing and a curse. At several points in Security Analysis (and to a lesser extent in his other works), Graham can not help but explore an interesting topic more deeply than is strictly necessary for his primary purpose. In this case, Graham could have said what many have since interpreted him as saying: in the short run, stock prices often get out of whack; in the long run, they are governed by the intrinsic value of the underlying business. Of course, Graham didn’t say that. Instead he chose to describe the stock market in a way that should have been of great interest to economists as well as investors. Data affects prices indirectly. The market is a lot like a fun house mirror. The resulting reflection is caused in part by the original data, but that does not mean the reflection is an accurate representation of the original data. To take this metaphor a step further, the Efficient Market Hypothesis is based on the idea that the original image acts on the mirror to create the reflection. It does not recognize the unpleasant truth that one can interpret the same process in a very different way. One could say it is the mirror that acts on the original image to create the reflection. In fact, that is often how we interpret the process. We say an object is reflected in a mirror. We rarely use the active “an object reflects in a mirror”. For some reason, when we talk about the market we like to use inappropriate metaphors. We talk about wealth being destroyed when prices fall. Yet, no one talks of wealth being destroyed when the price of some product falls. When the market rises, we talk about buyers, as if there wasn’t a seller on the other side of the trade. Above all else, we talk about “the market” not as a mere aggregation of trades, but as some sort of object all its own. The Efficient Market Hypothesis does not recognize the true importance of interpretation. Saying that data (publicly available information) acts on market prices omits the key step. After all, the same data is available to every blackjack player. Casinos just don’t like the way a card counter interprets that data. The Efficient Market Hypothesis is not the only argument against technical analysis. There is also empirical evidence that questions the utility of technical analysis. However, empirical evidence alone is not sufficient to prove technical analysis has no predictive power. If most knuckleball pitchers had limited success, the knuckleball might be an inherently ineffective pitch, or there might be a better way to throw it. The same is true of technical analysis. The adjective “random” is a very strange word. Although it is rarely the definition given, the most appropriate definition for random would have to be “having no discernible pattern”. The word discernible can not be omitted. If it is, we will take too high a view of science and statistics. There’s a great introduction to economics written by Carl Menger which begins: “All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary. Human progress has no tendency to cast it in doubt, but rather the effect of confirming it and of always further widening knowledge of the scope of its validity.” All things are subject to the law of cause and effect; therefore, nothing is truly random. A caused event must have a pattern – though that pattern needn’t be discernible. Even if one argued there is such a thing as an uncaused event, who would argue that stock price movements are uncaused? We know that they are caused by buying and selling. Stock prices are the effects of purposeful human actions. Several sciences study the causes of purposeful human action; so, it would be hard to argue any human action is uncaused. Furthermore, each of our own internal mental experiences suggests that our purposeful actions have very definite causes. We also know that the actions of some market participants are based in part on price movements. Many investors will admit as much. They may be lying. But, there is plenty of evidence to suggest they aren’t. If the actions of investors cause price movements, and past price movements are a partial cause of the actions of investors, then past price movements must partially cause future price movements. Technical analysis is logically valid. Not only is it possible that some form of technical analysis might have predictive power; I would argue it necessarily follows from the above assumptions that some form of technical analysis must have predictive power. So, why don’t I use technical analysis? I believe fundamental analysis is a far more powerful too. In fact, I believe fundamental analysis is so much more powerful that one ought not to spend any time on technical analysis that could instead be spent on fundamental analysis. I also believe there is more than enough fundamental analysis to keep an investor occupied; so, he shouldn’t devote any time to technical analysis. Personally, I feel I am much better suited to fundamental analysis than I am to technical analysis. Of course, there is no reason why this argument should hold any weight with you. I also believe there is sufficient empirical evidence to support the idea that fundamental analysis is a far more powerful tool than technical analysis. Even though I believe there must be some form of technical analysis that does have predictive power, the mental model of investing which I have constructed does not allow for such a form of technical analysis. In other words: logically, there must be an effective form of technical analysis, but practically, I pretend there isn’t. Why? Because I believe that’s the most useful model. One should adopt the most useful model not the most honest model. I’m willing to pretend technical analysis does not work, even though I know some form of it must work. Really, this isn’t all that strange. In science, I’m willing to pretend there are random events, even though I know there must not be random events. In math, I’m willing to pretend zero is a number, even though I know it must not be a number. A model with random events is useful. In most circumstances, a refusal to allow for random events would be harmful rather than helpful. The model with random events is simpler and more workable. The situation is much the same with zero. It isn’t a number. To include zero as a number, you would have to put aside the principles of arithmetic. So, we don’t do that. In school, you were taught that zero is a number, but that there are certain things you must never do with zero. You accepted that, because it was a simple, workable model. I propose you do much the same in the case of technical analysis. You should recognize the logical validity of technical analysis, but create a mental model of investing in which technical analysis has no utility whatsoever.

Selling a Structured Settlement

With the countless web sites, advertisements, legal jargon and complex issues surrounding structured settlements, it is easy to become overwhelmed and frustrated when you are simply searching for answers and straightforward information. Whether you’ve received a structured settlement already, or if you are just trying to better understand them, you’ve come to the right place for sifting through the messy details. What is a structured settlement? A structured settlement is a series of guaranteed payments (annuities) made over a certain period of time and is usually the result of an injury settlement or another situation in which you are awarded access to a substantial amount of money. It is the alternative to accepting an upfront lump sum. Structured settlements are individualized plans meant to help you cover present and future expenses. Working closely with an experienced attorney can help you to determine an effective structured settlement to give you the security of a fixed income over a set period of time. Example – how it might work: Melissa is injured in a serious car accident and is now unable to work for the next year. As a single parent, she has two young children to care for, not to mention her mounting medical expenses. She knows that she has to pay $25,000 in medical bills at the present time, and she knows that she will need surgery in a few months that will cost an additional $20,000. Her structured settlement can be set up to give her a lump sum to pay the present medical expenses right now, and be structured to give her an additional lump sum at the time of her surgery. It can also give her additional monthly payments equal to her salary for the year that she is unable to work, including an additional monthly payment to hire someone to help her care for her children while she is recovering from her injuries and medical procedures. Once Melissa goes back to work, monthly payments might cease or be reduced. Types of Structured Settlements Designated Period / Period Certain Annuities: Annuities with a designated period of time for the payments to be paid out. They can be made monthly, quarterly, semi-annually, annually, etc. Upon your death, all remaining payments are made to you beneficiary. Life Annuity: Periodic payments for a guaranteed number of years (based on your life expectancy) or for life, whichever is up first. Again, the beneficiary receives any remaining payments should you die before the full amount is paid. Temporary Life Annuity: Pay you for a designated number of years if you are still living, so your annuity ends when you die. There’s no provision for a beneficiary to collect remaining payments. Life Contingent Lump Sum: You’ll receive a lump sum, provided you are alive on the due date. If you die before this date, your beneficiary is not entitled to the amount. Lump sum: You can set it up to receive the lump sum on a particular date, say, fifteen years from now. Your beneficiary will receive the lump sum on the future date if you have died before then. The Details Though structured settlements contain a great degree of flexibility during the decision-making process (how much money do I need now, how much money will I need in the future, what are my present needs?), once you agree to the terms and sign the agreement, you can NOT alter the provisions. It is highly recommended that you have an attorney and trusted broker help you to determine the best payment methods for your situation. You might want to ask the broker to come up with several different scenarios and payment schedules so you can get a comprehensive look at your options. So, even if your situation changes down the road, your payments will not. That’s why it is extremely important to be thorough and careful when creating your payment schedule. Inadequate Payments Unfortunately, life has a way of throwing off our well-thought-out and well-intentioned plans. Even if you’ve done all your homework, shopped around for the best broker, interviewed many attorneys and carefully planned an effective payment schedule, you may still incur a large unexpected expense. Should this kind of situation arise, and you are strapped for cash, you would love to be able to make some adjustments to your settlement plan. Of course, this is prohibited. But you do have another option. You might consider selling a portion or all of your remaining structured settlement payments to an interested third party. Deciding to sell Before you decide to sell, think about what you want/need the money for. An immediate medical expense, buying a home or the decision to go back to school are usually considered good reasons. Examine your needs and the needs of your family as well. Perhaps you want a new home. Do you have children approaching college age? If so, you’ll not only incur significant tuition expenses, you’ll also have less of a need for a larger home. Selling your payments will result in a loss from the full amount. Consider whether or not it is important for you to sacrifice the security and future total amount before you make a decision. You will have to understand the implications, benefits and pitfalls so you can feel comfortable making an informed decision. Will I get the full amount that I would receive over a period of time? No. The amount you would receive over a period of time is calculated by adding interest to the principal amount. Instead, you may receive the present-day value of the amount. This present-day value may have to be further discounted to cover the costs to do the deal. The rest will be sent to you in one lump sum. You might want to shop around to find out where you can get the best deal. Court Order To ensure that you will not be taken advantage of in this delicate process, the government introduced a new federal law in 2002 that requires you to seek court approval when you sell your structured settlement. This law works in conjunction with state laws to direct how the transaction will be completed. Not only does this law protect you, the seller, it also helps the insurance companies who fear that they will face tax consequences as a result of the sale. The law states very clearly that annuity owners and providers do not and will not owe taxes as a result of this transaction. This breaks down the barrier that you might normally face from a reluctant insurance company. Selling Options You do not have to sell the entire remaining amount, or any particular amount, if you so wish. Here are your selling options: Full amount: The purchaser calculates the present-day value of the payments and offers a lump sum Part of the payments: Only a specific number of the future payments are sold at their present-day value Percentages: You may sell a percentage of each payment and keep the remaining balance for yourself Pitfalls of Selling Shady brokers. Selling your payments will require you to contact a broker who can help take care of the proceedings. This means that you might run into some game-playing and/or manipulation tactics if you happen to be dealing with a shady broker. They may promise you a high quote, only to come back and say that they can’t do the deal as is unless they get more money from you. Other brokers may claim to be “qualified” when they have only completed a week-long course. Make sure you’re dealing with a broker who has a couple of years experience in structured settlements and is a member of the Better Business Bureau. You end up losing money. As mentioned earlier, you will not receive the total amount you’d receive over time if you opt for selling your payments. Therefore you lose some money and the security of future payments. It takes time. Though the federal law requiring court oversight in these proceedings helps protect you, it also delays you from receiving the money as soon as you might have hoped. If you need the money right away, this could frustrate you and hinder your plans for prompt payment. Normally once you decide to sell your payments the process can take as little as 4 weeks and as long as 12 weeks to obtain the court order and for you to receive your lump sum. Benefits of Selling The main benefit of selling your structured settlement payments is, obviously, that you will receive a lump sum of cash for which you can utilize in any way you choose. This gives you increased flexibility in using your money, and can provide peace of mind if you have an immediate expense that couldn’t be paid any other way.